4. ESTUDIO EMPÍRICO
4.1. Proyecto Educación Saludable
limits to forecasting results
It is not only the obvious fluctuations in the incidence of major losses that make an accurate forecast of IFRS results impossible. The pronounced volatility of the capital markets and exchange rates as well as the special features of IFRS accounting also make it difficult to provide a result forecast. Thus, there may be significant fluctuations in the investment result, currency result and consolidated result, despite the fact that our assets are geared to the characteristics of our liabilities. In particular, a rising inter- est-rate level will initially tend to lead to lower results, and falling interest rates to higher results, than those forecast in these prospects. Net gains or losses on the dis- posal of derivatives used by us as hedging instruments and/or for fine-tuning invest- ments can influence the result, as can changes in their market value. Changes in exchange rates influence our result in different directions, depending on which foreign currencies are affected, although economically speaking we do not have any major open currency items on our books.
Reinsurance
Reinsurance continues to hold considerable promise for the future, with a wide variety of earnings opportunities. Munich Re offers its cedants specialist consulting services and extensive solutions, also for tasks such as balance sheet management, risk model- ling and asset-liability management. Reinsurance is an efficient and flexible option for protecting primary insurers against major claims and accumulation losses, or strength- ening their capital base. In addition to this, we devise innovative coverage concepts that go beyond the scope of traditional reinsurance. And we partner our clients in the often challenging task of adjusting to changes in regulatory requirements, which will be altered significantly in many countries in the coming years.
We see further good growth opportunities in life reinsurance. Opportunities will derive in particular from the dynamic expansion of the Asian life insurance markets and from the ongoing privatisation trends in provision for old age, long-term care and disability. Here, we analyse in detail how the related product features tie in with our risk strategy. In addition,we see increasing demand for the management of investment risks in life insurance products. We provide our clients with comprehensive solutions for hedging options and guarantees dependent on the capital markets.
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Munich Re (Group) targetsTarget 2013
Gross premiums written €bn 50–52
Consolidated result €bn Close to 3
Return on investment % Around 3.3
Return on risk-adjusted capital (RORAC) % 15
Information on the special features of IFRS accounting is provided on page 41
For 2013, we expect gross premiums written of €10–11bn and a technical result of around €0.4bn.
In 2010, we set ourselves the objective of achieving value added by new business of €450m a year by 2015 based on Market Consistent Embedded Value (MCEV) Prin- ciples. Given the further very good result posted in the past year, we see ourselves as well positioned to achieve this goal.
In property-casualty reinsurance, which is traditionally exposed to market cycles, Munich Re will maintain its clear, profit-oriented underwriting policy and accept risks only at commensurate prices, terms and conditions.
The renewals at 1 January 2013 again took place in a very competitive market environ- ment. The demand for reinsurance cover was relatively stable overall, given the primary insurers’ good capitalisation. At the same time, growth in primary insurance continued to be impacted by the difficult economic environment, but nevertheless remained largely constant. Reinsurers provided enough capacity, since their capital base contin- ued to strengthen in 2012.
Prices generally moved sideways. Rate increases were achieved only in segments with high loss ratios, especially in marine insurance, where Windstorm Sandy and the acci- dent involving the Costa Concordia led to significantly higher prices. US natural haz- ards business did not see any broad-based hardening of the market, despite Sandy. However, prices rose for loss-affected treaties; otherwise, rates remained largely stable. Latin American business showed slight price increases. In Australia, prices were main- tained at the previous year’s good level. By contrast, the market environment for natural catastrophe risks in Europe proved rather difficult, with further price reductions in some cases. Since the end of the last financial crisis, a certain amount of pressure on rates has also made itself felt in credit and surety business but rates are still at an acceptable level.
A premium volume of €9.2bn of our treaty business was up for renewal in January. We recorded a slight decrease of around €135m. In accordance with our profit-oriented underwriting policy, we again refrained from renewing business that did not meet our pricing requirements this year. For example, we continued to reduce European prop- erty-casualty business for cycle-related reasons. Overall, we managed to increase prices for our natural catastrophe business moderately, with the persistently low inter- est-rate-environment leading to price increases in casualty business. Altogether, we were able to improve the profitability of our portfolio by around 0.5% in a competitive market environment.
The renewals at 1 April 2013 (Japan and Korea) and 1 July 2013 (mainly parts of the US market, Australia and Latin America) will involve a premium volume of around €3.3bn, with a greater proportion of natural catastrophe business than the renewals in January. Altogether, we project that the markets will move sideways at a good level. Assuming the absence of major loss occurrences, we expect rates in natural catastrophe business to be stable. In casualty business, however, a further continuation of the low-interest- rate phase would favour the positive price trend.
For 2013, we anticipate gross premiums written of around €17bn in property-casualty business. We aim for a combined ratio of approximately 94% of net earned premiums. The uncertainties involved in the estimate derive in part from the random incidence of major individual losses.
If exchange rates remain constant, gross premiums in reinsurance should range between €27bn and €28bn overall in 2013. We project that the consolidated result in reinsurance will total between €2.3bn and €2.5bn in 2013.
Primary insurance
We see good opportunities not only in evolving foreign markets but also in various sec- tors of our German domestic market. Munich Re’s consolidated financial statements show the business transacted by ERGO in the three primary insurance segments life, health, and property-casualty. For 2013, we expect premium development in the indi- vidual segments to be varied.
In life primary insurance, our total premium income is likely to be below the previous year’s level at just over €7bn, with gross premiums written totalling somewhat more than €5.5bn. It should be borne in mind in this regard that developments in German and international business strongly depend on single-premium business with its vola- tile premium income. It remains to be seen whether clients understand that the re ductions in policyholder bonuses are necessary in the interests of financial sound- ness and sustainability. Besides this, our assumption is that our new products will be well received.
In the health primary insurance segment, the premium adjustments for our business in force as at 1 April 2013 will be more significant than in the previous year. The prices for new business, partly as a result of the adjustment to the actuarial interest rate and the introduction of unisex pricing, will also rise appreciably. This could have an adverse impact on the ability to attract new clients, as could the political debate on private health insurance. In supplementary health insurance, we expect further growth, partly owing to the introduction of subsidised long-term care insurance. We are therefore aiming for a slight increase in gross premiums written to just under €6bn.
In property-casualty insurance, we project that gross premiums written will total slightly more than €5.5bn, some €3.3bn of this deriving from German business, where we aim to achieve moderate growth. We continue to attach great importance to risk- commensurate prices, which in our business with commercial and industrial clients are not always attainable in the current market environment. We see potential for improve- ment in motor business. In international business, we are aiming to return to growth in the current year. However, there will be no premium income from ERGO Daum in South Korea in 2013, as we sold this company in the year under review. The combined ratio is likely to be around 95%.
Total premium income in primary insurance should amount to around €18.5bn in 2013, while gross premiums written are likely to be slightly higher than €17bn.
For the primary insurance segment, we project a consolidated result of €400–500m, and some €350–450m for the ERGO Group. The difference between the two figures is mainly attributable to intra-Group business between primary insurance and reinsurance.
Munich Health
The burdens from US Medicare business transacted by Windsor Health Group (WHG) and the write-downs due to the deterioration of the medium-term earnings situation at WHG had a significantly negative impact on the consolidated result for 2012. In view of the restructuring costs and investments incurred for improving managed care business, WHG is likely to again post a loss for 2013.
In reinsurance, we expect growth as a result of our clients’ increasing numbers of insureds and a rise in demand for non-traditional reinsurance solutions (e.g. capital substitute solutions).
We expect that gross premiums written will amount to somewhat more than €6.5bn in 2013. The combined ratio should be around 100%. Given the difficult situation at WHG, a further loss for Munich Health in 2013 cannot be ruled out. Altogether, notwithstand- ing the developments in the USA, we remain convinced that, owing to medical advances and improved life expectancy, there is a wide range of growth avenues for Munich Health in the international healthcare markets. And we intend to utilise these opportunities.
Investments
The 2012 financial year was characterised by political uncertainties and resultant vola- tilities in the capital markets. We are proceeding on the assumption that the situ ation in 2013 will be unstable as well. The main risks lie in the further development of the sovereign debt and banking crisis. A collapse of the European financial system, espe- cially major banks defaulting chaotically, or a sustained low interest-rate level with simultaneously rising inflation would hit the whole insurance industry hard, as it would all major investors. We systematically limit our risks and strive for a balanced exposure, so regard ourselves as well prepared. Given our broad diversification, every scenario involves losses in individual assets, but as a rule these would entail asset gains else- where, because diversification effects and our Group-wide asset-liability management are designed to effectively dampen any potentially negative effect economically. Our diversifying investment strategy during the past year proved its worth in this environ- ment and will therefore be pursued in 2013. We are planning, for instance, to further reduce our portfolio of government bonds in developed countries and to moderately build up investments in corporate bonds and emerging-market bonds. In 2012, the proportion of equities in our portfolio increased marginally. If suitable opportunities present themselves in the market, we may expand the proportion of investments in equities further to a very measured extent.
The structure of our investments is geared to that of our liabilities, thus limiting the interest-rate risk for the Group. In reinsurance, we are planning to cut the duration mar- ginally in 2013, while in primary insurance, where investments are dominated by life primary insurance, we aim to prolong the average investment period somewhat. In so doing, we can gear our positioning even more closely to the profile of our liabilities. Besides the interest-rate risk, we also take inflation risks into account in our invest- ments. We hedge part of our inflation-sensitive liabilities with inflation-linked bonds and inflation-linked swaps. We intend to keep the total portfolio of inflation-sensitive investments constant and to slightly expand our investments in commodities. Provided an adequate return can be expected, we aim to invest more in renewable energy and new technologies in 2013 as well. In 2012, we were able to expand Munich Re’s portfolio substantially to around €1bn. To achieve a broader spread of the port- folio’s main risk drivers, i.e. technical and political risk, we are aiming to continue strongly
diversifying our investments both regionally and technologically. There will be an add itional focus on infrastructure projects in the next few years. By the end of 2012, Munich Re had invested around €500m. We plan to maintain our real estate portfolio unchanged in terms of both volume and orientation in 2013.
For the coming year, we do not foresee any rapid and appreciable rise in capital market interest rates; regular income from our investments is therefore likely to be a relatively low 3.5% for 2013 as well. We anticipate an annual return on investment of around 3.3%, taking into account the result from the disposal of investments, write-ups and write-downs as well as other income and expenses.
Munich Re (Group)
Our assumption for 2013 is that gross premiums written will range between €50bn and €52bn, provided there are no significant changes in exchange rates compared with the end of 2012.
We are adhering to our long-term objective of a 15% return on our risk-adjusted capital (RORAC) after tax across the cycle of the insurance and interest-rate markets. However, this target will be difficult to achieve given the currently low level of interest rates on low-risk investments.
Provided that prices in reinsurance are stable and loss experience is average, our assumption for 2013 is that Munich Re will post a technical result of the same level as in 2012.
We are aiming for a consolidated result for 2013 of close to €3bn. For 2014, we expect to be able to achieve an even higher consolidated result. This profit guidance is subject to claims experience with regard to major losses being within normal bounds and to our income statement not being impacted by severe currency or capital market move- ments, significant changes in fiscal parameters, or other special factors.
Our shareholders can look forward to a dividend for 2012 which – subject to approval by the Annual General Meeting – will rise by 75 cents to €7.00 per share.
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Consolidated balance sheet 152
Consolidated income statement 154
statement of recognised income and expense 155
group statement of changes in equity 156
Consolidated cash flow statement 158
notes to the consolidated financial statements
Application of international Financial Reporting standards (iFRss) 159 Declaration of conformity with the german Corporate governance Code
in accordance with section 161 of the german stock Companies Act 159
Recognition and measurement 159
Consolidation 166
Assets
A intangible assets 171
b investments 172
C investments for the benefit of life insurance policyholders
who bear the investment risk 177
D Ceded share of technical provisions 177
e Receivables 177
F Cash at banks, cheques and cash in hand 177
g Deferred acquisition costs 177
h Deferred tax assets 178
i other assets 178
equity and liabilities
A equity 179
b subordinated liabilities 179
C gross technical provisions 179
D gross technical provisions for life insurance policies where
the investment risk is borne by the policyholders 182
e other accrued liabilities 182
F Liabilities 183
g Deferred tax liabilities 183
Foreign currency translation 184
segment reporting
segment assets 186
segment equity and liabilities 186
segment income statement 188
non-current assets by country 190
investments in long-term assets per segment 190
gross premiums written 191
notes to the consolidated balance sheet – Assets
01 goodwill 192
02 other intangible assets 195
03 Land and buildings, including buildings on third-party land 197
04 investments in affiliated companies and associates 198
05 Loans 198
06 other securities held to maturity 199
07 hierarchy for the fair value measurement of investments 200
08 other securities available for sale 202
09 other securities at fair value through profit or loss 204
10 Deposits retained on assumed reinsurance 208
11 other investments 208
12 Ceded share of technical provisions 209
14 Deferred acquisition costs 211
15 Deferred tax 213
16 other assets 214
17 non-current assets and disposal groups held for sale and sold
in the reporting period 216
notes to the consolidated balance sheet – equity and liabilities
18 equity 217
19 subordinated liabilities 220
20 unearned premiums 221
21 Provision for future policy benefits 223
22 Provision for outstanding claims 224
23 other technical provisions 228
24 gross technical provisions for life insurance policies where
the investment risk is borne by the policyholders 229
25 other accrued liabilities 230
26 bonds and notes issued 234
27 Deposits retained on ceded business 234
28 other liabilities 234
notes to the consolidated income statement
29 Premiums 237
30 income from technical interest 238
31 expenses for claims and benefits 239
32 operating expenses 241
33 investment result 242
34 other operating result 246
35 other non-operating result, impairment losses of goodwill
and net finance costs 247
36 taxes on income 248
Disclosures on risks from insurance contracts and financial instruments
37 Risks from life and health insurance business 251
38 Risks from property-casualty insurance business 258
39 Credit risks from ceded reinsurance business 263
40 Market risks from financing instruments – sensitivity analysis 264
other information
41 Parent 266
42 Related parties 266
43 Personnel expenses 266
44 Long-term incentive Plan 267
45 Mid-term incentive Plan 270
46 Remuneration report 271
47 number of staff 272
48 Auditor’s fees 272
49 Contingent liabilities, other financial commitments 272
50 Restrictions regarding transfer of capital 273
51 Leasing 273
52 events after the balance sheet date 275
53 earnings per share 275
54 Proposal for appropriation of profit 275
List of shareholdings as at 31 December 2012 in accordance with
Assets
Notes 31.12.2012 Prev. year Change
€m €m €m €m €m %
A. Intangible assets
i. goodwill (1) 3,376 3,511 –135 –3.8
ii. other intangible assets (2) 1,518 1,581 –63 –4.0
4,894 5,092 –198 –3.9
B. Investments
i. Land and buildings, including buildings
on third-party land (3) 3,831 3,889 –58 –1.5
thereof:
held for sale (17) – 13 –13 –100.0
ii. investments in affiliated
companies and associates (4) 1,467 1,154 313 27.1
thereof:
Associates accounted for
using the equity method 1,257 924 333 36.0
iii. Loans (5) 54,418 53,260 1,158 2.2
iV. other securities
1. held to maturity (6) 7 13 –6 –46.2
2. Available for sale (8) 133,196 123,677 9,519 7.7
thereof:
held for sale – 52 –52 –100.0
3. At fair value through profit or loss (9) 3,015 2,536 479 18.9
136,218 126,226 9,992 7.9
V. Deposits retained on
assumed reinsurance (10) 8,967 9,430 –463 –4.9
Vi. other investments (11) 2,964 2,655 309 11.6
207,865 196,614 11,251 5.7
C. Investments for the benefit of
life insurance policyholders
who bear the investment risk 5,958 5,093 865 17.0
D. Ceded share of technical provisions (12) 5,730 5,634 96 1.7
thereof:
held for sale – 13 –13 –100.0
E. Receivables
i. Current tax receivables 572 802 –230 –28.7
ii. other receivables (13) 11,475 11,292 183 1.6
12,047 12,094 –47 –0.4
F. Cash at banks, cheques and cash in hand 2,860 2,490 370 14.9
G. Deferred acquisition costs (14)
gross 9,256 9,386 –130 –1.4
Ceded share 74 44 30 68.2
net 9,182 9,342 –160 –1.7
H. Deferred tax assets (15) 6,219 7,547 –1,328 –17.6
I. Other assets (16) 3,605 3,674 –69 –1.9
Total assets 258,360 247,580 10,780 4.4